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In the last year I don’t think there is any area of fintech that has received more attention than the Banking-as-a-Service (BaaS) space. And it is not just the Synapse debacle, it is all the consent orders that have come out of the bank regulators. We have a banking system that pretty much demands that fintech companies partner with banks and we are still yet to figure out what the optimal business model is here.
My next guest on the Fintech One-on-One podcast is Jason Mikula, the publisher of Fintech Business Weekly and the Head of Industry, Strategy, Banking and Fintech at the risk decisioning platform Taktile. He has become one of the leading authorities on BaaS and has recently authored a book on this topic. It is the most comprehensive look at BaaS and the many challenges it has faced ever written and we delve into these challenge in this episode.
In this podcast you will learn:
- How Jason ended up living in the Netherlands.
- His impetus for starting the Fintech Business Weekly newsletter.
- What attracted Jason to covering Banking-as-a-Service.
- Why he decided to write a book on BaaS.
- How he frames the difference between BaaS and embedded finance.
- Why fintech companies have been attracted to omnibus or FBO accounts at banks.
- The interview that Jason did with founder and former CEO of Synapse, Sankaet Pathak.
- Where we are with the Synapse saga (as of mid-February, 2025).
- What Jason thinks the likelihood the impacted consumers will get their funds back.
- Whether we will ever learn what happened to missing 90-odd million dollars.
- His thoughts on the middleware model that was core to the development of BaaS.
- How he views the BaaS model evolving long term in the U.S.
Read a transcription of our conversation below.
FINTECH ONE-ON-ONE PODCAST NO. 523 – JASON MIKULA
Jason Mikula: At this point, there seems to be pretty broad consensus that having the middleware player have program management responsibility is just not workable. Technically, like legally technically, could you do it? Yeah? But because of how the incentives are structured, particularly given that these middleware companies and then the customer-facing fintechs that work with them tend to be early stage, venture-backed and unprofitable, where the incentive is to grow quickly so you can go raise more venture capital money. We’ve seen a lot of very similar kinds of issues that go along with what happens when you’re growing quickly and not necessarily scaling your controls comparably.
Peter Renton: This is the Fintech One-on-One Podcast, the show for fintech enthusiasts looking to better understand the leaders shaping fintech and banking today. My name is Peter Renton and since 2013, I’ve been conducting in-depth interviews with fintech founders and banking executives. On the show today, we are going to do a deep dive into banking as a service with Jason Mikula, the publisher of Fintech Business Weekly, who has authored a book on this subject. Jason is also the Head of Industry, Strategy, Banking and Fintech at Taktile. But in this conversation, we are focused on his new book and all the developments happening in the BaaS space. We talk about the difference between BaaS and embedded finance. We get the latest developments of the Synapse saga. We talk about the sustainability of the middleware model and much more. Now let’s get on with the show.
Welcome to the podcast, Jason.
JM: Peter, it’s good to see you. We just saw each other in person in Salt Lake, so it’s good to be able to catch up again.
PR: Yes, it is. It’s good to see you as well. And I know you’re not in Salt Lake right now, or even in America right now. So tell us a little bit about, you’ve got a really interesting background. So I want to delve into that a little bit, but you also, you have an interesting background as far as you decided to move to the Netherlands, which is not the typical, I don’t think, for the average American. So tell us a little about your background and how you came to be where you are.
JM: Yeah, I I’ve moved more times in my life than I care to think about. But the abbreviated version, I spent a bit over 10 years working in the consumer lending space, primarily in customer acquisition marketing and product management roles. That career trajectory took me from Chicago, where I worked for Enova, to San Francisco, where I worked for LendUp, and then New York where I was at Goldman working on Marcus. Interestingly, of those three, only Enova is still fully intact.
PR: Right.
JM: Take from that what you will. Then after my time at Goldman, I actually reconnected with some former Enova colleagues and I was in London working on a private student lending startup, also no longer in business. When it was time to leave that role, I ended up moving to the Netherlands for personal reasons. My partner moved here for his job and I wasn’t really super keen on staying in London, so I had to make a decision of like, is it time to go back to the US or am I taking the plunge and moving to, at the time it was Amsterdam, now we live a little bit outside? And that was more than five years ago, so I guess it’s going well.
PR: Right. In some ways you have an advantage on the rest of us because you get up early and you get to see all the news that happened overnight before anybody else does here in the US, but how easy is it to keep up with everything from the Netherlands because you are, you know, you’re not physically located here in the US but most of what you write about and most of what you talk about is US fintech.
JM: It’s interesting if you think of, I would say, not to talk my own book, but if I think of me, Alex Johnson, of course, is based in, I want to say it’s Bozeman, Montana, and Simon Taylor is in or near London. So none of us are in the epicenter of American finance. We’re not in San Francisco, we’re not in New York. It certainly does present some challenges. I mean, I think on a day-to-day, you’re actually absolutely right, I love that when I am starting to work at whatever time I actually start working, my inbox is quiet, my phone is quiet. I can have focused, whether it’s reading some complicated legal documents or writing, really good, deep, focused time. And then for me, 2 PM, 3 PM rolls around. It’s 9 AM in New York. And then the distractions just start rolling in. I think one of the benefits, and I really started doing the newsletter during the beginning of the pandemic in 2020. And at that point, there really was no choice but to connect digitally, whether that was Zoom or LinkedIn, social media, whatever. And that has remained a very good way to stay connected with people. I think the trade-off, at least as I see it for me personally, is it’s really important for me to go and spend time at industry events and conferences and whatnot to be able to connect with people face to face. I think the one thing that I kind of wish I had the chance to develop that I think would be easier in person is the kind of on-the-ground in-person sourcing you get from being somewhere like Washington DC where there’s a lot of things happening right now. But that said, I’ve found that if you build a reputation as a good, thorough, honest, ethical writer, analyst, journalist, sources will find you. And that’s certainly been the case for me in a number of the projects I’ve worked on, stories I’ve worked on.
PR: Right. Right. So let’s talk about Fintech Business Weekly. It comes into your inbox on every Sunday morning. I think I’ve been a subscriber from almost the beginning. Firstly, why did you decide to start a weekly newsletter? And then how has it evolved since you began?
JM: So there’s a couple of answers to the question of why I started it. And really, the first one goes back to the topics I mentioned, living in the Netherlands and the pandemic. When I moved here, I initially assumed I would get a job locally. I’d always had what I call a real job. Like a single full-time job where you go into an office and whatnot. And when I moved here, I assumed that I would end up, whether it was something more startup, fintech, or even, God forbid, one of the three Dutch banks, because there’s basically only three. And it was only after doing some sort of informational interview, coffee chat kind of circuit that I realized Dutch people don’t really borrow money the way that American people borrow money, British people borrow money. And I’m like, it took me coming into financial services from the outside, right? That first role at Enova, I didn’t know anything about how financial services worked, you know, the economic models, the legal and regulatory constraints. And so I learned a lot over 10 years of doing that, but so much of that knowledge, particularly the regulatory piece, is just not portable. I mean, even if you, you know, learn about the Fair Credit Reporting Act in the US or UDAAP, you know, those ideas are really very specific to that jurisdiction. In the UK, you have similar concepts, but how they’re actually written into law and enforced is quite different. And so I made a decision that it probably made more sense for me, and this was basically exactly five years ago at this point, made more sense to pivot to more consulting, contracting, advising than going to work for like ABN AMRO or ING or whatever.
PR: Right.
JM: And then with the pandemic, it was like, man, like we can’t travel. Like how I don’t have any local network in the Netherlands. I had just moved here, you know, maybe four months earlier. So really I leaned into it as a mechanism to maintain and build my network. And at least at the beginning, as a vehicle to drive consulting business, I’ll say there was sort of a secondary motivation because that’s the why now question. The why me or what’s different question, I think this has definitely changed a little bit, but looking around at the media ecosystem five years ago, it’s not like Bloomberg or the Wall Street Journal are going to cover anything except the very biggest private fintechs. They’ll write about Stripe, they’ll write about Chime and Klarna, which are all at this point quite large, essentially pre-IPO companies. You’re not going to find an in-depth piece on whatever Banking as a Service in the Wall Street Journal or Bloomberg. On the flip side, some of what I’ll call the tech press often serves almost more as a cheerleader. It’s like, look, a huge funding round. Valuation went up. But sometimes lacks the critical analysis of like, okay, this is the press release, this is the headline, but what’s really happening here?
And so I found that I had a hard time finding the kind of thing that I would want to read. And I figured if I feel this way, there must be other people that feel this way. And I think you really have seen not just me, but a whole generation of Substackers or whatever the platform is, where it’s like practitioner-writer. So people who are in industry, but also, whether it’s on LinkedIn or Twitter or a longer format, are filling in that trade media gap that I think exists to a certain extent, particularly in fintech. You know, banking, of course you have your associations, have ABA and CBA and ICBA, and you have a lot of community that exists around that. And I think that, you know, maybe it just took time for that to develop in the fintech ecosystem.
PR: Right. So given your background, Enova and LendUp are both short-term, you know, consumer lenders. You’ve got Marcus, which was obviously, started off in consumer lending, more sort of term, longer term loans. So you really focused on consumer lending. But you’ve evolved into this BaaS guy, Banking as a Service, right? So what attracted you to BaaS?
JM: Yeah, so I’m almost embarrassed to admit how little knowledge I had when I first started really going deep on this. And this was probably 2021. The most immediate motivation, if I’m remembering this correctly, I think it was Money2020 in 2021. That’s a mouthful. And I’m going around talking to people. It’s actually the first US Money 2020 show I’d ever been to. And there just seems to be this conventional wisdom of like, oh yeah, everyone knows there’s problems at this bank or there’s issues. Regulators are really like breathing down everybody’s neck about bank fintech partnerships and BaaS. And yet, again, this is 2021. Really, there was nothing publicly written at the time. There were, at that point, no recent partner bank related enforcement actions. The first one wasn’t until Blue Ridge in, I want to say, the fall of 2022. It really piqued my curiosity because I’m like, oh, well, it seems like it’s conventional wisdom that this is happening. There’s some crackdown on BaaS and yet there’s nothing in American Banker, Twitter, social media, there was very little, if any, public reporting or discourse on it. And so that really piqued my interest because I’m like, okay, well, clearly something is happening here. And I want to say I reported out a couple of pieces that were BaaS-related prior to that Blue Ridge action. That was the starting point. And I think part of the reason why it was so interesting to me is, again, to say this now, I’m a little bit embarrassed, but it’s like, in the US, if you want to do more or less anything with a regulated financial product or service, you pretty much have to have a bank partner. Obviously, there are some exceptions, know, money transmission licenses and LendUp and Enova used state-issued lending licenses for the small dollar products they offered. So obviously not universally true. But by and large, if you want to issue a debit card, if you want to facilitate the holding of deposits, if you want to write loans nationally without needing to deal with state-by-state charters, you have to have a bank partner. And so that nexus really has defined and driven so much of what the American fintech market looks like in a way that’s not really true in other geographies. There are definitely parallels, that sort of need of like, okay, if you want to do this, like you have to partner with the bank to do that.
PR: Right, right. So it’s one thing to sort of get an interest in this topic and write about it once a week. It’s another thing to then decide to go write a whole book about it, which you did. I have just finished reading it a couple of weeks ago, and it was a really fascinating story. I actually learned quite a bit. I really felt like you really gave it an in-depth look as no one’s ever written a book like this before. So what made you decide to go take on this extra thing? Cause it’s not, it’s not a great moneymaker, writing a book.
JM: It really isn’t!
PR: What made you do it?
JM: I mean, the short and honest answer is the publisher approached me and asked if I would submit a pitch on Banking as a Service. I think they had some awareness that this was a burgeoning topic and asked me to submit a pitch on it. Prior to that, I had done a 30- page or so report on the Banking as a Service space. I want to say that was like early 2023. But I mean, that was just, you know, there’s no comparing the amount of work that goes into writing whatever it is, a 260-ish page book versus, you know, a 30 -page PDF. And, you know, it gave me the opportunity to approach the topic in a more holistic way, right? So mean, the newsletter, I mean, the first part of that word is news, right? So it tends to be driven off like something happened and now I’m going to write, analyze, discuss that thing and the potential implications. Which, for people who’ve been in the industry as long as you or I have been, that’s probably fine because they’re coming into it with some base level of knowledge. What I wanted to do with the book, and I hope I achieved this, you can tell me if I did, was to sort of thread the needle of like, okay, there’s enough context setting that if there’s somebody who is earlier in his or her career, or maybe they’re coming into financial services from another industry, there’s enough context where they can understand like, this is why these things work the way they do. Maybe some people are not familiar with the idea of a dual state federal banking system because it’s very weird and it doesn’t exist in any other country. Or for readers outside the United States who don’t work in that market, who are used to interchange that might be capped at 20 bips. Like, what is this weird thing where there are banks that are smaller than 10 billion or more than 10 billion? And being able to explain some of that. I was working with a client recently, and I forget how it even came up. Something about, why are there so many of these fintech partner banks in Utah? And I was like, well, let me explain to you ILC charters, industrial loan companies, and the fact that Utah doesn’t have a usury cap, which helps explain why there are so many partner banks there. So I wanted to be able to provide this sort of context setting, that for some people might be something that they’ve been missing in the discourse, but still talk about these topics, the business models, the challenges in enough depth that battle-hardened industry folk like you and me hopefully still find value in it.
PR: Right, right. The thing that concerned me when I was starting to read, I thought, well, this was, I think June of 2024, you put it to bed, right? A lot has happened since then. I was wondering, is this going to feel out of date? And you did a good job because I feel like, thankfully, you had, you know, some of the things with Synapse, which we’ll get into that had already happened by the time you wrote the book. So you were able to touch on that, which I thought was very helpful. But the rest of it, I feel like, as you say, a lot of this is timeless, because we have this system that is complex and people need to understand it. And with that, I actually want to start out with, you devote an entire chapter of the book to this. And I think it’s worthwhile, relaying this to the audience. And that is the difference, how you see it. And I really liked how you put this actually in the book, the difference between BaaS and embedded finance. Why don’t you start and tell us how you kind of frame that.
JM: Yeah, absolutely. I think this is true, I suppose, in any industry. People love to sort of repackage and rename things that have existed for a long time. I get the sense that, you know, particularly with some of the struggles in the industry, folks may start moving away from that BaaS or Banking as a Service term. But, I think about it as like the how and the what. So embedded finance is the What. What product are you offering? Is it some sort of embedded payment? Is it some sort of embedded depository product? Is it a loan? And how is that being distributed? So, I think concrete examples of that could be Buy Now, Pay Later at point-of-sale when you’re checking out on e-commerce site. That is, in my mind, a quintessential example of embedded finance. You could also argue things like certain aspects of the Apple card, with the embedded savings account, and is provided by Goldman within Apple’s wallet app. I think of BasS as the How. So, the systems and the infrastructure and the operating model that allow you to offer it. And that bifurcation or difference between the two seems to resonate with folks.
PR: Right. Right. Okay. So before we get to Synapse, which I know you’ve spent a lot of time going into that. I want to talk about omnibus accounts, FBO accounts, For Benefit Of, right? This is a really critical piece to understand to really get what’s going on with Synapse and the rest of BasS for that matter. Why did fintech companies like these types of accounts?
JM: So my understanding is there are basically two main drivers. One is the economics. So the majority of the banks that play in this BaaS space or partner space are community banks, sub 10 billion in assets, particularly in order to take advantage of the fact that Durbin Amendment doesn’t limit interchange on them. The core providers, so, FIS, Fiserv, Jack Henry, historically have had commercial terms that have some kind of per account fee, right? So you can imagine if you’re Chime and you have, you know, 7 million or 10 million accounts, if all of those accounts individually were on core, meaning they exist in Chime’s case, that’d be like Bancorp and or Stride, exist in Bancorp’s system of record in their core system, presumably, and this is just illustrating, I don’t actually know what’s in their contract, but in this example, Bancorp would be incurring fees from their core provider based on the number of accounts, and Bancorp tends to make money, so they’re going to at best pass that through to Chime, or at worst, mark it up and pass it along to Chime, right? So FBOs, For the Benefit Of, it is essentially one bucket of money, one account sitting on the bank’s core system. And then the fintech provider and/or maybe some other middleware or technology service provider is actually keeping track of from that big bucket of money, how much belongs to each individual customer. So that solves the economic problem as far as like a per account fee. As I understand it, there’s also sort of a technology problem that that solves. So again, these legacy cores tend not to be the easiest to work with from an integration perspective, right? I mean, you’ve been around banking longer than I have. Historically, it’s not something that a bank would open up API access to their core to external third parties. Like this was not a normal thing, probably whatever, even 10 years ago. And so if you were wanting to build your customer-facing fintech and you want to have some amount of flexibility in the technology stack, you might not want to, or it might not even be possible to integrate with the bank’s underlying systems in such a way where you are in real time, essentially opening up accounts on that bank’s core. And so the FBO also served as a, frankly kind of janky, workaround to allow the customer facing fintech to basically build their own technology stack, whether that was them actually building it or partnering with various vendors and providers and whatnot. And then using that FBO at the bank to actually hold customer funds, with the important part being that you are able to accurately reconcile between the fintechs’ ledger and the underlying bucket or buckets of money.
PR: Right, right. And that’s really at the heart of the Synapse issue is that reconciliation was not done well at, you know, on either end, at the bank end or with Synapse. So maybe I don’t want to go through the whole of the Synapse debacle. I will link to the interview you did with Sam Kett that was, well, probably a couple of months ago now, but maybe you could just tell us the latest developments in Synapse? I should note: we’re recording this on February 10th, so we’ve got to put that marker in there. Things could change. So where are we now?
JM: It’s been at this point about 10-ish months since the original bankruptcy filing, which was in late April of 2024. Certainly far too much has happened to even remember it, frankly.
PR: Right.
JM: A lot of twists and turns. I mean, the two most recent pieces, one, as I reported out, there appears to be, or there is, a grand jury in the Southern District of New York, which is a criminal investigation, that is, grand juries are secret. So, we know that because there was actually a filing from a former Synapse employee in the bankruptcy trying to secure access to payments from the directors and officers insurance that specifically said this. And then I also had additional sourcing and reporting that confirmed that. Whether or not that ever turns into anything, I don’t know. I haven’t spoken with anyone who can tell me where that’s likely to go, but it is something that we know is happening. And then the main venue has been this bankruptcy case, which the judge has said many, many times correctly, that is just an entirely unprecedented bankruptcy case. Even the cases we’ve seen with some of the crypto companies like FTX and Celsius, were a little bit more orderly in the sense that you didn’t necessarily have as many data or reconciliation problems. The most recent status report and status hearing of the bankruptcy was actually just last week. Frankly, it’s not particularly encouraging. At this point, the estate, the entity that is like what’s left of Synapse, which is being run by the Chapter 11 trustee, former FDIC Chair, Jelena McWilliams. The estate doesn’t have any money. And so at a certain point, like the bankruptcy process is going to have to end because there are no funds for frankly anything. McWilliams and her firm Cravath aren’t getting paid, most likely will not get paid. And the real sort of pressing issue now is maintaining access to the data. I’m forgetting exactly, I think they said it might’ve been like 10 terabytes, but the actual expense just to preserve that data in a way that is going to be useful, whether that’s useful to law enforcement or useful to any customers and consumers who want to pursue a civil action. And there are multiple imputative class actions against, I want to say it’s the four banks in this case. If you want to execute that case, you presumably will need this data to do that. And I mean, it’s costing, I want to say in the hearing, McWilliams or one of her staffers said tens of thousands of dollars a month to preserve this data. And there’s really, at this point, no one, including government agencies, and regulators, that McWilliams made it sound like she had reached out to. No one has raised their hand to say, “Yeah, we’ll take this on to make sure that if there are questions, if there is a civil case that needs this information that it’s going to be available.” I think the last bit worth noting is in that last status hearing status update, McWilliams did reference either converting the case to a chapter seven, which would be a liquidation, so basically shutting this down, or dismissing the bankruptcy case. So it does seem like that specific piece, like the bankruptcy process itself, seems like it’s reaching the end of the road.
PR: But what’s really interesting to me, and I think a travesty for the people who were, who never even heard of Synapse when they lost access to their money, and that money is still gone. Some people’s life savings, certainly life-changing amounts of money for thousands, tens of thousands of people. It’s a travesty that we’re no closer, it seems, to resolving or them getting their money back. I’ve been disappointed with regulators, with the fact that no one’s willing to take this on. Obviously, this is still going to play out over some time. But what are the chances of these people getting their money back?
JM: So my opinion on that has evolved, no pun intended, over time. So I mean, shortly after this happened, and it was May 11th when the funds were actually frozen, if you asked me in a couple of weeks or even a couple of months after that, my opinion at that time was that people would eventually be made whole and get their funds back. Now, unfortunately, I don’t think that’s what the most likely outcome is going to be. Particularly with these putative class actions that have been filed, putative just meaning that the firm that has filed it wants it to be certified as a class action, but it is not yet certified. I think the last time I checked, there were three or four potential class actions. The way that that’s likely to unfold is they get consolidated into a single case that is certified and that case goes forward. Unfortunately, and I don’t want to pretend I’m an expert on class actions, but having spoken to folks who are more familiar with what those processes tend to look like than I am, what seems most likely to happen is that whichever firm is actually certified to represent the class, their incentives are basically to push for a quick settlement versus actually taking this to trial. Why is that sort of what their incentive set is? It’s like, if they settle quickly for 10 cents or 20 cents on the dollar, their risk is fairly low as far as the expenses they incur and they know that they’re going to get a payment. I think it’s typically about a third of whatever the total amount of the settlement is. Whereas if you take this to trial, or it’s like dragged out over a long period of time, the attorneys are running up fees, actually doing the research, dealing with whatever support or vendors they need to analyze the data presumably. And there’s no guarantee they end up winning if they take it to trial. So at least in the civil class action context, what seems to be the most likely is that you get a relatively quick settlement for an amount that’s probably substantially less than what people are owed.
PR: So do you think we’ll ever know what happened to that missing, I mean, whatever it is, 60, 80, 90 million dollars?
JM: I hope so. At this point, I have a medium to high degree of confidence that some of the issues or theories that have been discussed are accurate, so that there was some amount of money that was debited from customer funds for things like third party fees to Tabapay or fees to card networks that was coming out of customer money that shouldn’t have been, that there were, when Mercury was migrated, that perhaps more money was moved than really should have been. Not necessarily Mercury’s fault, but that may have contributed to the shortfall. But I mean, your question, are we ever going to know for sure, with specific dollar amounts attached? I certainly hope so, but at this point, it’s not looking promising.
PR: Right, right. So Synapse was a middleware company. You delved in the book into some depth into the middleware model. And obviously we’ve just recently heard about Solid, which has ceased operations, but there are others in the space. You know, there’s Treasury Prime, there’s Synctera , Unit. And a lot of these companies have pivoted to a slightly different way of doing business. But what are your thoughts on the intermediary [model] here that these companies have represented?
JM: So I think writ large, I’m fairly bearish. I agree with you that the companies that have pursued that model have pivoted or are attempting to pivot. I think about what were, and Synapse really was, as far as I’m aware in the US anyway, the pioneer of that model starting in like 2014. You know, what were the things that Synapse or companies in that cohort were doing. One is the contracting, so a contract between middleware and bank, but not necessarily a contract between customer-facing fintech and bank. That is definitely changing or has already changed. The technology layer, so I integrate with Synapse instead of having to integrate with the underlying bank. And the program management piece, and I mean, other odds and ends, certainly, but I think those are kind of like the three big things. At this point, there seems to be pretty broad consensus that having the middleware player have program management responsibility is just not workable. Like technically, like legally, technically, could you do it? Yeah? But because of how the incentives are structured, particularly given that these middleware companies and then the customer-facing fintechs that work with them tend to be early stage, venture-backed, and unprofitable, where the incentive is to grow quickly so you can go raise more venture capital money. We’ve seen a lot of very similar kinds of issues that go along with what happens when you’re growing quickly and not necessarily scaling your controls comparably. Those things are changing. Could I imagine a world where you have a middleware company that is primarily providing that technology layer? So the pivot that I think you’re describing, where instead of saying, I’m middleware and I am focused and I think of the fintech as my customer, it becomes I’m the middleware and I sell technology to banks to enable them to do this. That’s where you’ve at least heard the talking points go. Hopefully, the actual operating model in business follows that. But at that point, you’re now potentially competing with legacy core providers. So FIS has Atelio, although I haven’t heard that that’s been wildly successful, but they have it. And I would presume, Fiserv, Jack Henry, and other modern cores understand that there’s a demand for this capability from their customer base, the banks that are buying core systems, that they will seek to provide that capability. You have newer players like an Infinant, which also kind of work in this, I guess now we’re saying like side car core over the top. People are using different confusing language, but the idea that you have some piece of technology, some piece of software that sits outside of your core that lets you do this as a bank. And then what I sort of think of as like the BaaS native or the partner native banks, Column in my opinion being the best example of, “Hey, we are going to build our own technology from the ground up, purpose-built to do this as a business model. And we’re doing that within the bank rather than buying it from an existing core provider or buying it from a vendor like one of these middleware providers.” So I do think both the economics and then also the operating model that Synapse typified, I’m not convinced that, as a standalone business, is viable, with what we know now in 2025.
PR: Right, right. Okay, so we’re running out of time, we’re actually going over time, but I want to end with how you kind of see, I mean, given what you said, the realities of our banking system, we have a dual banking system to do any kind of regulated financial activity, you typically need to partner with a bank. So how do you see this playing out, where given that reality and the fact that a lot of these banks don’t have capabilities or haven’t had capabilities to work with fintechs easily. How do you view the BaaS model long-term?
JM: Yeah, so in, well, I guess this is true anywhere, but we’re talking specifically about the US. I found it helpful to think about it through the framework of supply and demand, particularly on the bank side, right? So, you and I both know, and I talk about it in the book, this idea of a non-bank entity partnering with a bank is not new. Synapse didn’t make it up in 2014. Long before Synapse was around, Bancorp was doing this kind of stuff with prepaid programs. You also had it in the payday space in the late 90s or early 2000s as well. So that model is not new. What I think really happened both with the rise of middleware, making it, at least in theory, making it easier for banks to get into this business, plus the just explosion of fintech as a category and VC funding, you know, 2014, 2015 through 2021, you saw a lot of banks rush into this space. They saw the outsize ROE return on equity numbers that some banks in this space put up, particularly those that have been doing it for a long time, that have a more mature business like a FinWise or a Bancorp. Very attractive if you’re seeing 20%, 40% ROE. What bank wouldn’t want to do that? So we saw a huge inflation in the number of banks playing in this space. I don’t think I’ve ever seen a definitive list, but conventional wisdom is maybe between 100 and 150. But we’ve seen banks exit the space. Blue Ridge, after getting that second enforcement action, made the decision to exit. I want to say MCB exited as well. But you’ve also seen banks that have run into some regulatory issues and say, “We’re committed to this as the model,” Piermont being an example there. So I think we’re still in a point in time where this supply on the bank side and the demand, meaning companies, primarily fintechs, but also maybe brands that want to add some sort of embedded finance capability, we’re still figuring out where is the happy equilibrium between how many banks can have a meaningful business in this space, and then how much demand is there for these services. And I don’t think we’ve come to the happy equilibrium yet.
PR: Okay, on that note, we’ll have to leave it there, Jason. It’s always great to chat with you. Thank you so much for coming on the show today.
JM: Yeah, anytime.
PR: I first got exposed to this concept of BaaS, or what used to be called bank-fintech partnerships, back in the early days of peer-to-peer lending. Both Lending Club and Prosper used a Utah bank called WebBank to originate their loans. Then I got to know Cross River Bank, who was an early supporter of our LendIt events, and we watched them grow and expand beyond the lending vertical. This is more than 10 years ago, and there was only around a dozen banks or so partnering with fintechs. As Jason said, now there are over 100 with varying degrees of capability. What the events I think of the last year have taught us is that it is not an easy way for a bank to make money. You cannot be a tourist here. To be a successful BaaS bank, you have to be fully committed to the endeavor. Anyway, that’s it for today’s show. If you enjoy these episodes, please go ahead and subscribe, tell a friend or leave a review. And thank you so much for listening.